Address: 963 Somerville, Irvine, CA 92620 (Northwood)
Plan: 1481 sq ft – 3/2.5
MLS: S482981 DOM: 124
Sale History: 1/12/2006: $628,000
10/3/2002: $360,000
9/19/2000: $283,000
4/29/1999: $232,000
Price Reduced: 07/05/07 — $645,000 to $599,980
Current Price: $599,980
This is our third post featuring the Greystone Villas tract (#1, #2). We’ll provide updates to those homes but first let’s take a look at this one. Here we’ve got a 3bd/2.5ba Plan B that was purchased for $628,000 ($565,200 loan at 7%) on 1/12/2006 . It was immediately rented out for $2,350/month on 1/20/2006. How negative do you suppose that cashflow is?
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It looks like a refinance was done on 7/31/2006 through PMC Bancorp – $536,000 First Mortgage at 1% (teaser rate?) and a $67,000 HELOC. The property was eventually listed for sale on 4/9/2007 for $645,000. A price drop on 7/5/2007 brought the price down to $599,980. If sold at the asking price of $599,980, the investor stands to lose over $64,000 (assuming 6% in selling costs and not including negative cash flow).
Soo.. what’s the latest with the 3 bedrooms in this tract? First let’s update the older posts:
Update on Post #1: 129 Islington was taken off the market on 10/19/2006.
Update on Post #2: 301 Rathbourne is accepting backup offers and is showing a price of $599,900 (loss of $61,000 assuming 6% selling costs).
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601 Newcastle sold for $615,000 on 4/12/2007 – 76 DOM (orig at $649,000).
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135 Islington sold for $610,000 on 3/17/2007 – 202 DOM. (orig at $669,900)
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161 Islington rented for $2,700 on 4/25/2007. (orig at $724,000)
Currently, these are the 3 bedrooms (same plan) on the market competing with our new feature, 963 Somerville:
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39 Darlington – $655,000 (Purchased for $680,000 on 8/22/2006)
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125 Islington – $619,000
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141 Islington – $594,000 (Bank Owned!)
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311 Rathbourne – $617,500
141 Islington is Bank Owned and 39 Darlington as well as 963 Somerville could be headed in that direction. The tract high price of $680k compared to the $599.9k sale in escrow represents an 11.7% drop in prices has already occurred.
New Paradigm Shift in lending.
If you need to borrow more than $417,000 to facilitate a home purchase, you’d better have a considerable amount of scratch to put down, you’d better have a 720 or better fico score, you’d better have a firm way of proving your income, and you’d better be prepared to pay an additional 175 basis points vs. a conventional, conforming loan.
Welcome back to the real world.
—–
But, but lee in irvine…doesn’t real estate ALWAYS go up? Even when you wipe out at least half the buying pool? Seriously, this is like giving a mass margin call to all stock investors. Bush was adamant yesterday that the lending caps on Fannie and Freddie would not be raised and the extra 175 bps you mentioned was started by Wells Fargo, but they’ll all fall in line quickly. Pop goes the bubble. Adios flippers. Cash (not debt) is king again.
Redemption, at last, for those long-suffering savers that didn’t (literally) buy the hype. It will be fascinating to see how it all shakes out, but whatever it’s gonna be, it won’t be pretty.
Sale History:
4/29/1999: $232,000
9/19/2000: $283,000
10/3/2002: $360,000
1/12/2006: $628,000
A book could be written about manias just on the above information.
66k per year in tax free appreciation for 6 years.
New “Mortgage Meltdown” section in the LA Times
http://www.latimes.com/business/la-fi-homejobs11aug11,0,4597857.story?coll=la-home-center
In a Spiraling Credit Crisis, Large Mortgages Grow Costly
http://www.nytimes.com/2007/08/12/business/12mortgage.html?pagewanted=2&_r=1&hp
When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.
…
The Wall Street investment banker who wanted a jumbo mortgage had a good credit score, and is not a subprime borrower. But private mortgage securities are now hard to sell, leading to his problem. In the end, he was able to get a mortgage with a lower interest rate, but it will adjust in five years, possibly to a much higher level.
…
“In California, it has shut down the purchase market,” said Jeff Jaye, a mortgage broker in the Bay area. “It has shut down the refi market.”
For those of you sitting on the sideline, I am wondering just how far you expect things to decline. I have heard of irrational exuberance, I have also seen first hand irrational doom and gloom. Both can lead to horrendous mistakes. There are obviously a large number of people over there head, however there are many, many more, who are in great shape.
Here is an article on the optimistic side.
http://article.nationalreview.com/?q=Y2Y5NGVmODQzNTEwOGZmMzExNzRkYzBkMzA4OGI1ZGM=
Obviously rates are higher, and the subprime market is in a state of paralysis. But it is not too hard to envision scenarios were the things could turn out just rosy for most of the recent buyers in the Irvine market. For example, what happens if the Fed lowers rates to 200 bps. I bet at that level the vast majority of home owners could refinance there ARMS and MTAs and IO into fairly respectible loans they can handle. If things get bad enough, and seeing $140MM in Boca Raton condos get put back to the banks on Friday is pretty bad, why wouldn’t the Fed step in?
The Fed has a pretty strong history of stepping in when needed, 1987, 1992, 2001. All the talk about inflation is just that. The Fed has several responsibilities including, limiting inflation, maintaining employment levels, steady GDP growth, protecting the dollar exchange rate, and serving as the backstop for the banking system.
If I were a betting man, and I am, I would bet that the unemployment and GDP growth are going to come right the top if things really hit the skids.
As long as the MSM keeps calling it a subprime problem, there does not seem to be much of a problem. But, as soon as folks get a clue and realize this is a debt, (credit), problem and a over the counter derivatives problem, the numbers get a little larger. The BIS “estimates” the total over the counter derivatives at between $400 tril and $500 tril. That is 3 X the size of the world GDP. Ask Ben Stein if the implosion of $400 tril of paper might be a problem.
American Home blew up and left $300 mil of mortgage loans unfunded and not one of their loans was subprime. Again, it is not a subprime problem. Subprime is just the canary in the coal mine.
While I agree that capitalismworks, I’m hoping to get in here before awgee posts something on the yen carry trade or bonds. =) (His stuff is good, just thought I’d take a free poke.)
The reason it won’t work is commonly called GIGO, garbage in – garbage out or more succinctly, you can only polish a terd so much. The people who took 2/28 arms, or NINJA loans (No interest, no job or asset) or neg amortization loans or all three couldn’t qualify for their house in the first place.
They took a loan out for 700K, they want 700K, and now they want proof they can pay 700K. Sure they Fed can “open the window”, sure Kramer can go off on tv again, but if they can’t qualify for 700K, then it doesn’t really matter.
As for Fed lowering rates and that lowering LIBOR or general mortgage rates, that’s mostly myth. If the Fed lowers the rate, and the bond markets (foreign or domestic) sniff at it and think it’s stinky. Then the cheese doesn’t get sold. No purchasing of T-bills/bonds, then the Fed has to make the price lower to make the rate higher to make the bond worth it. When the Fed throws money from helicopters, that is inflation period. Bernanke might not do that specifically, but he did just inject liquidity two days ago to settle the credit markets.
Yea, those jittery guys want to go round 2 with NINJA borrowers with inflation, hedge funds dropping, brokers losing their shirts, no markets for resale. I’d say their not going to.
damn, damn, damn, took long to write my post and awgee DID get in before me. /sigh, LOL
Why is is credit problem exactly? Spreads are tight, and I am sure a few of the sausages factories are going to miss their commissions, but credit seems to be fine. Are you suggesting that the Bank of International Settlements (BIS) entire estimated number of the size of the OTC derivatives market is going to go belly up? Just because a few hedge funds are going to disappear does not equal global financial meltdown. I have a very hard time imagining Goldman (Read: this is no American Home) is going to have any trouble making good on their outstanding swap contracts.
Since we got on the topic of losses. What do you estimate the total losses will be related to the subprime sector alone? Ignore the contagion on other asset classes and the potential for forced selling. Just in subprime.
The national review and rational economic thought don’t seem to go along much anymore.
Lowering the interest rate to 200bps would cause inflation to boom and simply cause the much needed correction to be more prolonged and painful. Not to mention the dollar will sink like the Titanic. When a country has a negative savings rate and the average home in areas requires 50% of gross income at the least to buy – you’re in trouble. The best thing to do is let capitalism work and punish both foolish lenders and borrowers
Darin,
Agreed for the most part. Tons of total crap loans out there. The ninja is my favorite. And yes, given tightening lending standards forced by the inability to “polish the turds”, there is a strong case for Hell. I just don’t think the Fed/Government will wait for anything too bad to happen.
Paraphrasing Bernanke, deflation is the worst thing that can happen. IF the housing sector, 23% of the economy, and the most unreactive sector in relation to Fed interest action, starts to really die, the Fed will respond hard and fast (sorry about all the commas).
They just can’t risk letting this whole thing slide off the table.
Keep in mind that 401K contributions are not included in that calculation. 401K is now the preferred savings vehicle, as opposed to passbook accounts paying nothing. Including 401K contributions the “savings rate” is not negative at all.
Do you really think the Fed has that much control over inflation? Low wage earners around the globe will continue to depress wages for the next decade. The dollar is still the only reserve currency, and despite the recent grumblings out of China, very likely to stay. China still has a few hundred million farmers looking for jobs, they need the good old U.S. to keep chugging along.
I’ve been following this blog for a while and I’ve noticed that the common theme seems to be “let’s all predict how low the market will go…then let’s all go and buy us a home”. The problem with this strategy is that very few people will ever time the bottom exactly when it hit’s the low. My guess is that all the complainers and pessimists on this blog who hope prices keep falling so they can jump into the market probably had a chance to buy houses several years ago when prices were much lower but they thought they were too high then…so they waited and they waited and prices went up and now they’ll probably make the same mistake waiting for prices to go lower and lower. I don’t doubt that the market will continue to fall for a while but we’ve seen some pretty good drops so far and if I were in the market for a house I’d start looking to buy now while rate are still reasonable and prices have rolled back already significantly. Who cares if we have not hit bottom. If you actually plan to live in your house for more than 5 years and you need a place to live and you can make the mortgage payments I’d start thinking about jumping in now. I think the problem with a lot of people is they look at their house as a retirement investment, as opposed to a necessary part of life…we all need somewhere to live.
Another point on how far the market will drop…one variable I have not seen much analysis on is rental rates. I’ve seen some pretty wild predictions but they don’t pencil out relative to rental rates. Basically, if we all agree that the rental market is strong and there does not seem to be any indicators that rental prices are or will be dropping any time soon then you can pretty much factor what the “max” bottom of the market will be. Basically, if a 1,100 sf apartment leases for $2,000 in Irvine and you figure out the present value of that payment which equates to somewhere around $306,000 on a 30 year loan, we can infer from this that the ultimate max bottom would be around $278 per square foot because it goes to reason that at this price point “if the market got this low” investors would start to buy the real estate like hot cakes because it would cash flow immediately and renters would decide that they could own rather than rent and get the tax break and all the other benefits of home ownership at break even or less. Also, since I’ve been in Orange County for almost 18 years I’ve never seen any homes on average sell at a price where they would cash flow immediately if you turned right around and rented the place. Right now the average price per sf seems to be around $400 and based on rental rates I can’t see this number dropping much lower than $350 per sf and a real bottoming out would be $325.
I’m not a real estate expert so maybe I’m just crazy but this is my theory.
“I don’t doubt that the market will continue to fall for a while but we’ve seen some pretty good drops so far and if I were in the market for a house I’d start looking to buy now while rate are still reasonable and prices have rolled back already significantly. ”
You would start looking to buy now, after the credit events we’ve had in the past week or so? Can’t you see where this is headed? It would be a big mistake to enter the market in CA now, even for those who are still able to. IMO, the smart money will remain on the sidelines for at least a few more years – large % decreases in price will continue for some time.
Credit seems to be fine? Where were you Thursday and Friday? News Flash! The credit markets went into siezure and the world’s CBs threw out loans of more than $300 bil. That is more than after 9-11.
Truthfully, I don’t have a clue how much of the OTC derivatives might blow up, but to ignore them and suggest that the problem is only subprime is either denial or just plain stupidity.
“Just because a few hedge funds are going to disappear does not equal global financial meltdown”Strawman
Until American Home melted and Countrywide admitted that the defaults are not just occuring in subprime, no imaginged ALT-A or prime would be a problem, yet you still have Bubblevisiion talking about how small the subprime market is, and how the size of the credit problem is being exagerated.
“What do you estimate the total losses will be related to the subprime sector alone? Ignore the contagion on other asset classes and the potential for forced selling. Just in subprime.”Sorry, I don’t have an estimate. I have read them, but a subprime estimate is irrelevant. Focusing on the subprime mortgage part of the credit market is like an oncologist focusing on a runny nose and ignoring liver cancer.
Oh yeah, a little off the subject, but, a central bank, fractional reserve banking, and fiat currency are antithetical to a capitalist economy.
Exactly
In a Spiraling Credit Crisis, Large Mortgages Grow Costly
http://www.nytimes.com/2007/08/12/business/12mortgage.html?_r=1&hp&oref=slogin
When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.
“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.
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Mortgage crunch hits Bay Area hard because of jumbo loans
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/08/09/BU3IREG2E.DTL&hw=mortgages&sn=004&sc=657
Kurt Herrenbruck, a mortgage planner with Fishman Financial Group in Berkeley, saw one client’s financing evaporate in the space of three days last week.
“The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment,” Herrenbruck said. “He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup.”
Herrenbruck said Wednesday he found two lenders willing to make a no-document loan. But by Thursday it was down to one. And Friday, when his client’s offer was accepted, there was none. “He can’t buy even though he had the strongest profile of any no-doc: superlative credit, money in the bank and a whopping down payment.”
If this housing crash follows the same pattern as all the others – then when it bottoms out it will stay there for a few years. There’s no rush.
Capitalismworks,
I love the name but I disagree with some of your points of view. I can tell you first hand that this is going to be monumental in its crash. I am not exaggerating when I tell you that 1 out of every 4 people I speak to are going to lose there home within 2 years. The amount of people in California that have negatively amortizing mortgages is unbelievable. AS many people have pointed out on this blog, there is a direct correlation between home prices and the type of financing available.
Here’s one person I spoke to on Friday… She did a cashout refi in Nov 2004 for 385k. Her 2 bd condo in Aliso appraised for 480k then. She thinks its 500k now, but a zillow est, AVM, and title search puts value roughly at 460k tops. Mean while her neg am loan has increased her balance to 413k. She went from 80% LTV to 90% LTV in less than 3 years. She cant afford the IO payment on her new first and piggyback HELOC. She was pleading with me to remove her escrow account. I had a 72 year old retired couple that bought there home in 1967 for 38k and now owe 575k on a horrendous 8.5% neg am. In 13 months there payments are going from 1685 to 4133 a month!! I had to tell them this to their faces. There is absolutely nothing they can do. Nothing.
They are not alone, and in fact, my job has become a broken record the last few months. This was BEFORE the recent rate hikes. All of these ARMS that are recasting are NOT NEG AMS. It is impossible to predict when they recast and the rates are already adjusting monthly. These are all traditional 3/1 and 5/1 arms. If you add the neg ams into the mix you get a stonishing revelation.
I wish that I could do a live webcast while I was at work so you folks can see what I deal with on a daily basis. I thought about writing a lengthy email to Cramer and see if I get a response.
As someone deeply rooted in the industry I only wish for continued prosperity; however, I am a realist first and a capitalist second. If you believe in free markets, then you believe that they can soar or crash and burn. A vast portion of the people that jumped into the market in the last 5 years, should never been homeowners anyways under traditional circumstances. I believe the market will not be corrected until ALL of those people have been removed from their homes.
It’s said to see but they don’t call it the American Reality. They coined the phrase “American Dream” for a reason.
awgee,
I think you should be more respectful when the treasury secretary Henry Paulson comments on the blog. Don’t you know he is just on damage control right now from all the “contained” comments. Hopefully he didn’t read http://www.bloomberg.com/apps/news?pid=20601087&sid=a.pPEmZeZZCk&refer=home It was even in the OC Register with a great description of a “liquidity crisis”.
I don’t know about you but when Countrywide and WAMU (who are about a 1000 times larger than AHL) state that they are having liquidity issues I think the problem goes beyond subprime, hedgefunds and AHL. But who am I? I’m just a guy like you who believes in true free-market capitalism and for the day we don’t need the Fed injecting a couple borrowed 100 billion a day to save the market.
I was thinking about doing a post for the blog on option arms. I want to explain how they work which I do know. I also wanted to share a story of how I made someone send in their 3 day right of rescission to of all places AHL because in 22 months their payment would recast from $1580 to $4520. I’d love to have some stories from the street since I am no longer in the biz. You know my handle and you know the web address here to email me some stories if you would like.
lendingmaestro
Unbelievable (I believe every word) post. I knew it was bad, but I didn’t know it had already accelerated to the lengths you describe. Particularly heart wrenching is the story of the 72 y/o retired couple facing disaster. At least the younger crowd caught in this mess have a chance to take bankruptcy and move on. As far as getting an email through to Cramer, you might, but cnbc’s Diana Olick has a blog on their site that she reads and answers email on. She doesn’t get the attention Cramer does, but she has a pretty big following and she’s anything but a REIC cheerleader on the air (at least not the few times I’ve seen her.)
For the posters who think this blog is only for bitter renters, that’s just plain not true. I bought a house in Del Mar after Greenspan’s dot.com bubble burst and had planned to live there a long time. When it tripled in value in six short years, I sold it and decided to ask questions later. I’m now a very happy renter. There are other people on this blog who did the same or similar thing and still others who own right now and are (rightly) a little concerned about their equity.
Housing is a product. Like any other product, its price is determined by supply and demand. When the system is flooded with fiat currency, easy credit and no underwriting standards, demand goes up along with prices. When the easy credit contracts (or “seizes up,” as some are labeling it now) the reverse holds true. Unfortunately, this bubble was packaged and marketed as “the American Dream” and a lot of the masses bit. Hard. Now people are slowly waking up to the fact that after all the hype it was just an illusion. Where the blame lies for all this is for another thread.
“I had a 72 year old retired couple that bought there home in 1967 for 38k and now owe 575k on a horrendous 8.5% neg am.”
What the heck did they do with the 575k? Where did the money go? they got to have at least SOME equity for such an amount. That they’ll default on their mortgage and face foreclosure in 13 months is sad, but what the hell where they thinking? That they could keep the cake and still eat it?
Sry if this is harsh, but I’m totally flaggergasted at the very idea (that seems to be widespread among Americans) that mortgages and HELOCs are some kind of income…
“When it tripled in value in six short years, I sold it and decided to ask questions later. I’m now a very happy renter.”
Congratulations on doing the right thing! You sold the cake when the price was high. That’s what the retired couple should have been doing. But it seems that they, like many others, wanted to participate in the gold rush without wanting to relocate. They should have known better. The boom gave them a chance to make some serious money, but only at the price of moving. They didn’t want to, so they went for the second best thing and mortgaged their home. But this isn’t the same, not even close. A loan is a loan is a loan. It’s NOT money they earned. Their line of thinking was madness.
🙁
A loan is a loan is a loan. It’s NOT money they earned. Their line of thinking was madness.
Gray
You got that right, my friend. The big decision for me came after that last surge up in prices. I was going to stay put because I really liked that house and had bought it right, i.e. 20% down and a 30 year fixed. I really hadn’t been paying very close attention to the “free” money lending practices and “flip this house” mentality up until then. I did about 2 days worth of research and decided prices could not be sustained at those levels and immediately put my house on the market with what I thought was an outrageous, WTF price. Imagine my surprise when my agent came to me two weeks later with a full price offer! No great genius on my part, just pure luck. Since I wasn’t prepared to move, I ended up putting all my stuff in storage and moved to Las Vegas for a year to a brand new 2br-2ba condo for $900/ mo. I ended up moving back to SD for slightly more rent, but I have no regrets whatsoever. That was a once in a lifetime windfall for me, most of it tax free. I called my agent the other day to see what she could sell it for today, bottom line, no wishing or wtf prices and let’s just say it was deep six figures less. The house across the street has a NOD on it, btw.
Job Losses in So Cal.
Slightly off topic…I know, but I work for a major lender that has announced that they will no longer be making a lot of loans that were our “bread and butter” for the last five years or so – no Alt-A, sub-prime, seconds, HELOC, etc. No one wants to buy them.
This will cause an enormous contraction in credit. I wonder who will be able to buy all the REO’s now? If the only people who can buy are full-doc buyers with 20% cash to put down…where are they going to come from? There aren’t enough of them to buy all of the houses that are going to get dumped on the market. Even if they want to buy, who will buy the house they already own so they can move up?
The other thing no one talks about is job losses. With all these lenders now now making a lot of these loans, a lot of people are going to lose their jobs. There is no way a typical lender can keep these people employed if their loan volume drops by50-60%.
Sobering thoughts…
For a couple years I speculated, mostly to my wife, that the re market was going to have a big correction, but last summer my eyes were opened to see just how bad the correction might be. After we sold our home, we didn’t find anything to rent that we were particulatly interested in, so we figured it was a good time to go on vacation. We had no more house payment, no rent, electric bill, cable bill, etc., so we borrowed by dad’s motor home and started off accross the country. You find out quickly that the motor home set is very friendly with other motor homers, and if you are driving a huge class A motor coach, the parks have a tendency to put you with the other class A’s. For the uninitiated, class A’s are those 8.5 foot wide, min 35 foot long, diesel buses that start at $150,000 and go to $2 mil. Early in our trip I was shocked to discover from some friendly folk that they had borrowed on their primary residence in order to purchase one of these monstrosities. And as our trip progressed, it became apparent that mortgaging to buy an RV is not the exception. It may not be the rule, but it is the majority. And most of these folks are retired and using their pensions and SS to pay the monthly on their coach. I always wanted to ask why they didn’t use their 401k money to make the purchase, but my suspicion, and yes it is just a suspicion, is that if they had a 401k or IRA, they would have used it.
Retired folk borrowing on their homes to buy a depreciating asset which requires maintenence and diesel fuel. What else have folks been buying? And then it occured to me. This economy that the MSM keeps describing as being so strong is actually an economy built on debt. No different than the Jonses keeping up by spending more and more on credit cards. At some point the credit card company will say no more.
Prices going up and down is not inflation. Many people think that if they price of real estate skyrockets or oil or whatever, that we have inflation. That is simply not true.
Inflation has *only* to do with the amount of money in an economy and subsequently the amount of money moving around in an economy. That is something that the Fed has direct control over. Among their tools are printing cash, selling or buying T-bills/bonds and adjusting the reserve rate ratio (too late for that now). All of these tools and others affect both the amount of money and the velocity of money.
Chinese farmers and wages and all the other factors of the world are just natural parts of the global economy that lower and raise prices.
As for the savings rate, economists are probably the most habitual people I know. True, times change and retirement funds are an alternative methods to save. The importance behind the negative savings rate is how much american families can deal with difficulties. Passbook accounts are liquid and can be easily accessed, 401Ks are not. Technically, getting money from a 401K is easy, but the ramifications for savings are not the same as liquid dollars. As we like to say here…
Cash is king.
There are a couple of threads on this site that you might want to check out to see how other people make their assumptions and what kind of numbers they end up with. As with any prediction of the future, the assumptions are key, your mileage may vary, and your pixie dust may ( and probably will) fail you. We continue to talk for a variety of reasons, one of them is what you stated. Others are schadenfreude, another especially for me is the inability to look away when there is going to be a car crash or a hurricane or a housing market fall.
Sorry, I don’t know how to shrink a url in a blog posting,
Rental rates versus square footage
http://forums.irvinehousingblog.com/discussion/598/bottom-calling-quail-hill-pricetorent-ratios-220-293-per-square-foot/#Item_16
And two from the Analysis tab
https://www.irvinehousingblog.com/2007/03/11/predictions-for-irvine-housing-market/
https://www.irvinehousingblog.com/2007/03/09/what-if-prices-dropped-to-fundamental-values/
INFLATION? You gotta be kidding.
I went shopping for clothes yesterday. Polo shirts that used to cost 35 bucks in the late 70s, you can buy today for 15 bucks and after the “additional discounts” at checkout they only cost 10 bucks.
Then I bought a pair of good sunglasses. I used to pay like 70 bucks back in the 70s and even 80s. Yesterday I paid 15 bucks.
Dude, there’s no inflation at all. Milk and beef are high because of grain being diverted for ethanol, but if you compare a 77 Honda Accord with an 07 Honda Fit you realize that the Fit is the better, larger car and costs like 100% more, after 30 years!
At this stage of the game, the danger is DEFLATION, not INFLATION.
Besides, the Europeans are riding high with the Euro but they have some fundamental problems of their own. It’s only a matter of time before those issues hit them on the head. And, they too are running into serious issues RIGHT NOW with their credit and RE markets. So don’t be surprised if they too drop their credit rates pronto!
The problem right now is not a subprime problem but an overall credit problem that is spilling into the liquid markets. As some else said, if you need to raise cash, then you sell what you can, and so the Stock Market is getting hit.
Then you get the enterprise lending needs… if they can’t get their credit the economy too will falter.
A downward spiral and DEFLATION.
What the Fed needs to do RIGHT NOW is to dramatically drop interest rates fast and at the same time tighten credit standards so that money won’t ever again be free.
Selling at the top was the right move if you were single or able to move. It’s different when you have kids in school and stable jobs. Moving is not really an option.
But then, at that point you should look at your home not as a piggy bank but as your HOME. And if you have a good loan, a payment that’s doable, like where you’re at… heck why move? Why HELOC your way to hell?
Besides, our “deal of a lifetime” was loading up the cart with CSCO ( and a bit of MSFT) from 94 through 97 and then blowing it all off in the first half of 2000.
WOooooooooooHOooooooooooooo!!!!!
You think RE was a good ride? Dude, those of us who timed the dot.com wave were surfing the North Shore in da winta’ The Muddah of all bubbles/waves which -if caught right- shames the 04->06 RE market to just a little wave in HB State Beach.
300% total increase? Hah! How about doubling your money every year from ’94 through ’00?
As far as the retired couple is concerned…I really have no idea. I was telling my co-worker that when these people finally make it up to Heaven, God isn’t even going to bother with “the lambs book of life.” The first thing out of his mouth will be “what the hell did you do with all that money!’
I can tell you that many, many people bought 2nd or third homes. You can’t believe the percentage of credit reports I look at that have 3, 4, 5 mortgages. Sure enough the balanced owed is more than the original balance. That’s right, neg am loans.
Imagine the lunacy it takes to buy a home with a negatively amortizing loan. Say you suck out 100k from your primary and flop on a 2nd home purchase. That’s 20% down and now you do a neg am loan on the 400k. Good job smarty pants!! From the very first month, they started losing equity, and the equity they had wasn’t from price appreciation, it was their down payment!!
Mind boggling, I know, but this is so rampant among our friends and coleagues.
BUT…. surely their mortgage brokers have to share some of the responsibility? After all, aren’t their ethical standards in that field?
Of course, they do stand to lose their commission…. years ago we walked away from signing a loan on our rental property and sold it instead. The mortgage broker was furious, but hey! It wasn’t what WE wanted and I wasn’t about to do a loan that was not in MY best interest.
We actually walked out at the signing. Drove to Yorba Linda on a friday afternoon on the toll road, sat down, insisted on taking a close look at the closing costs and terms before we signed ANYTHING., noted discrepancies that were “non negotiable”. So, after about five minutes with the loan officer we politely declined it, got up, drove home and had a good dinner at the Pacific Brewery. We put the house on sale the next Monday.
The damn mortgage broker haunted us for a few days… then the next christmas he left me a nasty message. Well, I called him back and flat out old him that I’d be telling my RE broker friends in Irvine about what he just did. I sure did, I even saved him voice message and replayed it.
I guess the mortgage/RE industry really needs to be policed more closely. How many times have you seen where the promised terms for a loan are not the ones at closing. Or where closing COSTS are added at the last minute. In fact, eons ago we were sold a loan that had an “option” for negAm. Mind you, we always made the full payment but we got stuck with the stigma of a bad loan and we were not even told about it.
In my business, engineering, we know our vendor costs before we cut a PO. We don’t do none of that “estimated” crap.
tonye
Besides, our “deal of a lifetime” was loading up the cart with CSCO ( and a bit of MSFT) from 94 through 97 and then blowing it all off in the first half of 2000.
WOooooooooooHOooooooooooooo!!!!!
You think RE was a good ride? Dude, those of us who timed the dot.com wave were surfing the North Shore in da winta’ The Muddah of all bubbles/waves which -if caught right- shames the 04->06 RE market to just a little wave in HB State Beach.
300% total increase? Hah! How about doubling your money every year from ‘94 through ‘00?
Who says I didn’t? How do you think I got the dough to buy the joint in the first place? You think you’re the only one who ever heard of csco or msft?
People who are convinced that there is no inflation are fooling themselves or have been drinking too much Larry Kudlow Kool-Aid.
You may be able to buy clothing and electronics now much cheaper than you could ten years ago, but I can guarantee that you that they will fall apart 100x more quickly so there really is no bargain.
I bet your Polo shirts from the 70s are still wearable unlike the ones you purchase now that fall apart after just a few washings.
My grandparents have their original General Electric appliances in their kitchen that are almost 50 years old. Their water heater and their carpets are over 30 years old. You could just say that they’re cheap, but the fact is nothing you buy now will last nearly as long. Ten years if you’re lucky.
So what if my Vuarnets could last 50 years or a 70s Lacosta was built to last 10 years ( true on both counts), they were overbuilt for their intended purpose: I’m lucky if I don’t lose my sunglasses within six months of buying them, and my waist is nowhere where it was in my youth.
Besides, quality has not dropped so much…
Those GE appliances were very expensive then. My nine year old Viking range top is better built than a GE from the 50s and costs less in inflation adjusted dollars. Siimilarly my GE Monogram and Advantium ovens are well built too (even if the oven’s electronic panel did fail once). But our GE convection ovens is cheaper in inflation adjusted dollars than anything from the 50s and it provides cooking features unheard of in the 50s.
Nevermind the Advantium oven. That was past Star Trek for the Brady Bunch era…. Robby the Robot had never conceived of an Advantium over either.
Technology is making things much cheaper to build while keeping the same level of quality. This is because the supply chain is better controlled, manufacturing is automated, the cost of electronic controls has plummeted, etc…. the only thing that has gone up is the cost of labor, but our efficiency is far, FAR higher than it used to be.
Then you got China and the 3rd world providing cheap semi-skilled labor for labor intensive products. That’s a force on the deflation side.
The thing is we are all born short a home. If you aren’t owning your renting. Either way there is some monthly nut that has to be shelled. My objective is to minimize my monthly cash flow while maximizing the utility of my home (location and space).
Based on rental NOI, PTI on Gross Income, equivalent rent, etc. it is pretty clear the houses were overvalued at 2005/06 prices.
It is easy to say that prices are going down, that is the trend. I am trying to figure out the same thing as everbody on this board. When is the bottom, and what are prices going to be then? More importantly, since the total collapse of the housing market seems to be the consensus view, what if anything could stabalize things, ultimately preventing prices from reaching intrinsic value in a reasonable time-frame?
Remember, for homeowners who bought in 1997, and watched their places double in price in about 5 years, 2001 looked like and unbelievable time to sell. Interest rates appeared low, 9/11 was (and is) really scary, and everywhere you looked rent were cheap. If you sold in 2001 you f’d yourself in the a, period end of story. Not to say it wasn’t a “rational” decision (as if any decision in the most emotional of all investments/transactions can be). Based on the fundamentals selling in 2001 selling made all the sense in the world.
The primary reason it didn’t work was the Fed. A 1.00% overnight rate is an overwhelming inducment to borrow. It is obvious now, and probably to many observers then, that asset price bubbles would be created, but the Fed did it anyway.
There have been articles saying the pool of low cost labor in the devleloping world (ex. India, China) that allowed growth without much inflation, have dried up.
That means we are back to the old situation where growth triggers more inflation.
Hence the Fed’s stance.
Can anyone answer the following (something I’ve wondered about for the longest time):
Why on earth are we not utilizing the labor pool available closer to home?
I can’t think of a single good reason why we don’t do more business with Mexico, and other places in our own hemisphere (and not communists to boot).
I just don’t get it. Why we accept leaving our neighbors in utter poverty, and then send all our money to asia is simply beyond me.
Maybe as energy considerations become more critical, that will happen.
I hope so.
TinyURL.com will convert your links into a few characters.
I always wondered why it was used, lol, got it…now, thanks
You are welcome.
I appreciate your insights.
On a related note, I’m sure it is fun to refresh your browser to see the latest comment, but an easier way to get up-to-the-minute information is to select the “Subscribe to comments via email” checkbox on your first reply on a given topic 🙂
I am not sure everyone realizes this.
I have not figured out how to get comments via email without posting a reply.
tonye,
You have to admit though, that if someone were to come up to you RIGHT NOW and say that they will give you 300K tax free, and all you would have to do is inconvenience yourself and your family by moving into a rental house…you would have to seriously think about taking that offer.
Sue,
I think you are having way too much fun with the credit crunch thing!
You are mistaken about all loans being gone.
They are tougher and more expensive, but not gone.
In about 2000 or so, someone said, “Hey! Clinton’s economic policies paid off the national debt. We can all invest now.” So, we did, and we all lost about 70% of our worth after the crash of 2001 or 2002? Also, someone said, “Hey! If you invest in 200 companies, how can all of them crash at the same time? It’s called a mutual fund. So, many municipalities and many of us retired folk invested in mutual funds. But, we all lost 70% of our worth. Someone said there is good and bad everywhere. Well, what do you think? I think we are going to re-evalutate what we think Bill Clinton did for US.